When Pubs Briefly Replaced Banks in Ireland

Today we are going to discuss the Irish Banking Strike of 1970 when all of the countries clearing banks closed for over six months, only to find themselves quickly replaced by local pubs. We will discuss if something like this could work again, and at the end of the video we will compare how the system that emerged compares to more modern ideas like cryptocurrencies.

Between 1966 and 1976, there were three major banking strikes in Ireland in which all of the clearing banks were closed.  The Strike in 1970 was the longest of the three, where the banks were entirely closed for six and a half months.  In the lead up to the strike, bank staff had been working short hours, and a backlog in check processing had built up. While the banks technically reopened in mid-November of 1970, it took them until February of 1971 to process the backlog of checks and resume normal working hours. So, all in all, the banks in Ireland were either closed or were offering severely reduced services for almost an entire year.

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Transcript

What would happen if a country’s banking system shut down altogether?  How much harm might it do to the economy?  It’s quite reasonable to guess that such an event would bring an economy to a screeching halt. 
Today we are going to see what actually happened in Ireland in 1970 when all of the banks closed for over six months, only to find themselves quickly and fairly seamlessly replaced by local pubs. We will discuss if something like this could work again, and at the end of the video we will compare how the system that emerged compares to more modern ideas like cryptocurrencies.
So, between 1966 and 1976, there were three major banking strikes in Ireland in which all of the clearing banks were closed.  The Strike in 1970 was the longest of the three, where the banks were entirely closed for six and a half months.  In the lead up to the strike, bank staff had been working short hours, and a backlog in cheque processing had built up. And so while the banks technically reopened in mid-November of 1970, it took them until February of 1971 to process the backlog of cheques and resume normal working hours. So, all in all, the banks in Ireland were either closed or were offering severely reduced services for almost an entire year. 
Most economists would predict that in the scenario that Ireland faced in 1970, you would likely see a collapse in the money supply, a credit crunch, a trade implosion, mass unemployment, a collapse in GDP, and a return to a system of barter.
In fact, when the strike began some international newspapers at the time referred to Ireland as a Banana Republic.  I think that was supposed to be an insult, but in 1970’s Ireland, a banana was considered an exotic fruit, and if you want to insult us, you’re just going to have to do a bit better than that.
As you can imagine, economists were shocked to see that the economy actually did just fine, in fact it even grew.  The graph you see on screen right now shows quarterly GDP, and the periods when the banks were on strike are shown in red. Although the money supply did contract severely, neither trade, commerce, nor industry came to a grinding halt. Now, there were some problems, but overall the Irish economy escaped largely unscathed.
So, how did things work?  Well, when the banks closed, there was still a certain amount of paper money that was out there in the economy, and it of course stayed circulating in the economy since the people who held cash were unable to deposit it at banks, so some money was still available and could be used for trade. 
Next up, the pubs and local shops of Ireland come into play. Particularly in rural areas, but in truth all over the country, publicans and shop keepers knew their customers well. They knew who they could trust and who was untrustworthy. In addition, they knew where their customers lived and worked. According to The Central Bank of Ireland, 11,000 pubs and 12,000 local shops stepped in and acted as bank substitutes over the duration of the strike.
In 1970 I guess, we learned that in Ireland a good pub might actually be more important than a banking system. And I’m guessing that people found sorting out their finances a lot more fun than when the actual banks were open.
It is worth noting that when the strike started, there was no way of knowing how long it would last, so while the economy generally functioned as normal, some of this was due to a belief that the banks would most likely reopen in the next few days – and that idea just dragged on month after month.  In addition, banking in the 70’s was a lot simpler than it is today. There were no electronic payment systems like the credit and debit cards that we use, and things like direct deposits weren’t used very much at all. People and businesses mostly transacted using cash and checks.
According to the Central Bank of Ireland, 90% of manufacturers and construction companies in the country, paid most wages and salaries in cash back in the 60’s and 70’s. Before the strike, about half of Irish households received their income in cash, and then due to the strike, this proportion rose to around 60 per cent.
So cash was important during the strike, but checks were even more important.  The Irish economy was able to keep going because people paid each other using checks that were drawn on accounts at the banks which were closed.  When they ran out of official checks they paid using IOU’s.
So why were the Irish able to get by like this, without the need for banks? Well, it turns out that Ireland in 1970 was unusually well set up for a situation like this. Antoin Murphy at Trinity College Dublin described the Irish Economy of the time as being characterized by intense, frequent, personal contact, where solid local knowledge circulated at high velocity within and across communities. The result was that both borrowers and lenders could build solid microfoundations of trust. 
Basically, the idea is that when you’ve been chatting with your neighbors every night at the local pub for the last twenty years, you have a pretty good instinct as to whether their checks are a good bet or not. (In addition, you know, just how much to discount an IOU to earn a fair return, that neither damages your friendships, nor costs you money). If you are an Irish pub owner, and you’ve been chatting with your customers, you know their families and you’ve been occasionally extending them credit over the years, then you’re even better positioned to become a banker in a country without banks. And that’s exactly the role that pubs began to play.
A publican named John Dempsey was quoted at the time in the papers as saying “I’m holding cheques for thousands of pounds, but I’m not worried. The last bank strike went on for 12 weeks and I didn’t have a single ‘bouncer.’ I deal only with my regulars; I refuse strangers. I suppose I’ve been able to keep a few local factories going.”
Over the period of the strike, the people of Ireland were either able to use cash or checks to pay one another. A personalized credit system developed without any definite time horizon for the eventual clearance of debits and credits.  This adequately substituted for the existing institutionalized banking system over the period of the strike.
After a while people ran out of official bank cheques, and just made their own. Official bank cheques at the time in Ireland – and still today - have a government stamp on them, in effect a tax on each payment. When people ran out of their official checks they started putting a postage stamp on the new homemade ones to make sure they were in compliance with the law. In pubs, the insides of cigarette packets suddenly became bills of exchange, as patrons dumped out the cigarettes, wrote up a cheque, stuck on a postage stamp and handed it to the bar tender.
At Dunnes, one of Irelands largest retail chains, people would line up outside the Accounts Department to cash cheques. News reports from the time describe a school teacher lined up with his monthly salary cheque, followed by a bookkeeper from a local manufacturing firm presenting a much larger cheque to change into cash for wage packets. The accountant at Dunnes told the newspapers “They are mostly strangers to us, and we just have to play it by ear in deciding whether to accept a cheque or not”
In the days before modern security systems, small shopkeepers worried about storing these valuable pieces of paper. One publican in Dublin's Liberties stored a pile checks up his chimney in the summer and didn't tell his wife. She lit the fire on the first cold September evening and when he realized his cheques had gone up in smoke he had a heart attack.
So, What happened to all of the bankers who were on strike? Well the strike impacted Irish bankers in a number of ways. The union called a strike, but there was no strike pay for the bankers, many of them emigrated to England where they could work and some but not all returned to Ireland after the strike. The singer Christy Moore, who started out as a banker, went to England due to a strike but didn't return to banking when the strike was settled. He told a reporter "I had a wild and wonderful time in England, with no bank manager looking over my shoulder,". He formed a band and the rest is history.  In 2007 he was named as Ireland’s greatest living musician in the People of The Year Awards.
While the abiding memory of the bank shut down is of how people adapted and survived, not everything ran smoothly. Because of the lack of banking services, businesses had to divert staff to run around to shops and pubs looking for cash to pay wages.  This could be a slow process and meant that many businesses had to shoulder the additional costs of having employees focused on this task, rather than on their core business. 
The Irish Stock Market suffered too, trading volumes overall fell by about one-third. This was more concentrated in the early stages of the closure. Most subsequent business was transacted on a ‘deferred payment’ basis. Prices were agreed, cheques were issued and accepted by brokers in the normal way, but documents of title were not delivered until the cheques were cleared.
Interest payments on Government bonds couldn’t be paid and pensioners who relied on bond coupons and dividends suffered. The registers of ownership were held in the Bank of Ireland’s vaults and were inaccessible at the time, causing financial hardship for many retirees.
Property deals of all kinds were blocked not only by the difficulty of transferring funds but because many title documents were kept in bank vaults which were inaccessible.
Business investments into fixed capital was negatively affected. Twenty percent of manufacturing firms reported being obliged to cut back or postpone capital projects. Financing investment was a problem mainly for smaller companies with less than 100 employees. Many construction projects were postponed, but some of this was due to a cement strike that happened at the same time.
It is surprising to see that even foreign trade took less of a hit than might be expected. Less than 10 per cent of manufacturing firms had to import less due to payment problems caused by the bank strike. 
Many businesses that were involved in international trade were able to bank in Northern Ireland or Great Britain, and when it came to paying for imports, companies with exports kept some of their earnings with foreign banks and were able to pay for imports.
Real per capita GDP growth was somewhat subdued over the period, but there were other strikes as well, in particular a cement strike that affected the construction industry. The overall picture that emerges from this period though is of an economy that continued to function relatively well, without any clearing banks.
So what about fraud? 
Over the period of the strike it is estimated that ten million cheques and IOU’s with a total value of over five billion dollars changed hands in Ireland without any clearing or settlement.  As you can imagine there was a lot of opportunity for fraud. People in Ireland were hard up at the time, there was high unemployment and the reason for the strikes (which were not restricted to the banking sector at the time) was the high level of inflation which meant that people’s incomes were not keeping up with their expenses.
A well-known racehorse trainer at the time didn’t have the money needed, but wanted to buy a horse. He paid by cheque knowing that he didn't have the funds to meet it. Fortunately for him the horse won a number of races, meaning that he had no trouble honoring the cheque and made a handsome profit without having to pay any interest for a very risky venture.
The number of frauds investigated when the banks reopened was reported to have soared 10 times, which obviously is a huge increase, but the actual number of cases might surprise you. There were only 750 cases investigated in a country of three million people.
When the next Irish bank strike came, six years later, memories of bouncing cheques were still in many publicans’ minds.  Summing up the more cautious mood in 1976, one publican hung a sign behind the bar that read: “When the banks start serving booze, we will start cashing cheques”!
After the strike ended, there was an increase in the number of bankruptcies and liquidations of businesses in Ireland. A large shipping and transportation company (Palgrave Murphy) failed when settlements were made, but reports from the time say that its failure was largely unrelated to the strike.
The Irish bank strike of 1970 is a fascinating experiment in monetary economics. At first glance, the relative benign effects of the strike seem to support the view that money and credit are close substitutes. For the period of the strike, credit replaced money to a surprising extent ─ vindicating those who see credit as an almost perfect substitute for money. However, a thorough inspection of this period shows that towards the end of the strike severe strains were appearing in the system.  The economy had changed such that everyone was now acting as a bank.
It is worth taking a moment to think about how it works when you accept a check in return for goods and services. In such a transaction you are exposed to credit risk until you have deposited the check at your bank and the funds have cleared.  This means that you are exposed to a few days of credit risk.
In Ireland with the banks closed, there was no clearing and settlement. Without this happening there was a rising mountain of bilateral debt between members of society. Because of the bank strike, households and companies could not really participate in the economy without accumulating more and more cheques. Since the cheques couldn’t usually be passed on to third parties they were not in circulation. 
That means that workers who were paid by cheque couldn’t usually pass on their pay cheques. They had to keep them until the banks reopened. Then, to pay for their daily purchases they had to write their own personal cheques. Retailers who accepted cheques as payments for goods could not use these cheques received from their customers to make payments to wholesalers. 
The majority of cheques drawn on Banks during the dispute were held either by the original payees or, more rarely, by individuals and firms with whom they were subsequently negotiated.” Thus, all of those active in the economy who couldn’t rely on cash income to make payments were accumulating cheques they had received and at the same time the value of cheques they had written was increasing more or less in parallel. Throughout the economy, the balance sheets of non-banks were getting longer and longer. Almost everybody became a banker.
While early on, you could easily assess the credit quality of the people you dealt with based on how well you knew them, and how honest you believed them to be, the quality of a cheque became increasingly difficult to assess over time. 
For example, a factory worker may be convinced that the business they work for is in good shape and their employer is honest. But over time, the factory is accumulating the cheques of its customers. So, the financial position of the factory worker depends increasingly on their ability to evaluate the creditworthiness of their employer’s customers. As long as the strike dragged out, this aspect became increasingly important.
As I mentioned earlier, some of the credit risk inherent in a financial system like this did crystallize, as there were some bankruptcies when everything unwound, but it was not on such a scale as to be systemic.
It is worth noting, that this framework which worked in Ireland can’t reasonably be applied to countries in which the solvency of the banks is in doubt. During the strike, the banks were closed. But they were expected to open in the not-so distant future. The reason for the closure was NOT that the banks were in trouble. In this respect, the situation in Ireland differs from a more typical banking crisis in which banks are closed because there is good reason to believe that the banks are insolvent.
You might be asking yourself if such a system of local pubs filling in as banks could work today the way it worked in 1970? Well, most modern economies are very different to the Irish economy of the 1970’s. Today payments are mostly electronic and almost instant, economies are more globalized and interdependent.  Things move at a faster pace, and businesses operate on a much larger scale - think multi-billion-dollar semiconductor factories instead of the smaller scale manufacturing that would have been going on in Ireland fifty years ago. People move around a lot more, and don’t really know their neighbors the way they used to.  It is hard to imagine that things would go as smoothly today as they did then, but equally, back then it was expected to be a disaster too.
I made a video about six months ago on the topic of short selling.  In the video I argued that I don’t believe in it as a good long-term strategy.  I based this argument on the empirical evidence that short selling funds generally don’t do very well, but I also argued that it is generally a mistake to bet against people who are backed into a corner.  Even if you find the worst managed company in the world that is operating in a terrible business, the employees and managers of that firm are most likely coming into work every day doing their best to add value and make things work, so that they can make their money and improve their station in life.
The best investors I know tend to be optimists, and situations like the Irish banking strike of 1970 show why this makes sense.  Even in terrible situations, the people most impacted seem to find ways of getting things to work because their wellbeing depends on it. 
Instead of letting the bankers’ strike collapse the nations prosperity, the people of Ireland decided, that they could simply get on with the day-to-day business of banking themselves.
Section 10 - Importance of trust and relationships
One of the things I have been mulling over while researching this piece is that the most important element that helped sustain economic activity at the time was trust between contracting parties. In many cases, transactors knew each other. Thus, there was a widespread readiness to accept cheques and IOU’s even though it was clear that settlement might not occur for quite some time.
In recent years, Blockchain technology has grown as a response to the trust crisis that swept the world in the wake of the financial crisis of 2007 - 2008. Bitcoin and other blockchain-based systems are put forth as a “trustless” alternative to existing financial institutions and even governments. Over the last decade there have been a number of big frauds within the crypto space, and many of the biggest proponents of these trustless systems don’t necessarily strike me as being particularly trustworthy people.  I was in Houston this February when an unusually cold spell left many residents without power or water.  The roads were treacherous, as there were no salt spreaders or snowplows available.  In this tough situation (where people were still trying to socially distance), neighbors helped each other out. Those with generators, invited neighbors in to stay warm and charge their phones, those with plumbing skills went from house to house on their streets helping to fix burst pipes, people shared water, supplies and food.
Often when people prepare for difficult times they stockpile food and other resources and think up ways of escaping society imagining a dystopian mad max like future.  In most real world examples it would appear that maybe the best way to prepare for difficult times is to develop strong friendships.  Maybe trust is more important to a functioning society than trustless systems.  
If you liked this video, you will probably enjoy my video on John Law – The man who introduced paper money to the world, I’ll link to it in the description.  See you next week, bye.